Mostly midsize, these family-owned firms often have attractive pipelines of potential drugs in development but lack the size and flexibility to support the huge costs -- about $1 billion per drug -- to fully develop them and bring them to market.
The companies also lack the funds to expand into more-lucrative markets that can cushion losses when European authorities clamp down on prices. For example, France's senior-health-advisory body, la Haute Autorite de sante, recommended this past fall that the state stop reimbursing patients for 221 drugs to cut health spending. Currently the state reimburses patients for 35% of the medicine's cost. In Britain, the National Institute for Clinical Excellence for a time declined to allow the taxpayer-funded National Health Service to pay for Roche Holding AG's Herceptin to treat women with early-stage breast cancer. After multiple requests, NICE in June proposed that NHS use it for both early- and late-stage cancers.
"Big European family-owned companies can stay strong, viable and independent as long as they want," said Lehman Brothers Vice Chairman Frederick Frank, who specializes in pharmaceuticals and health care. "But the midsize ones like Pierre Fabre in France will find it harder and harder to survive unless they become more enterprising."
The plight of these companies underscores the difficulties facing many closely held companies throughout the region, though the situation is particularly challenging for the pharmaceutical industry. Consolidation is rife as big drug companies seek to bulk up through acquisitions and private-equity companies seek investment targets.
Like many of Europe's family-owned businesses, the pharmaceutical companies have expanded beyond their borders as their market becomes more international. But expansion into U.S. and Japanese markets is particularly vexing for family-owned European drug firms because the costs of development are so high and the process so fraught: Nine of 10 new drug candidates fail in clinical studies because the preliminary laboratory and animal tests don't accurately predict safety and effectiveness, according to the U.S. Food and Drug Administration. If a drug fails, companies often struggle to find capital to start anew.
Merck KGaA is one of the larger European midsize family companies, with 5.9 billion euros ($7.5 billion) in sales in 2005. But its recent experience underscores the troubles of the peer group. After spending 100 million euros to 200 million euros developing Sarizotan, a drug for Parkinson's disease, the company suspended research in the final stage of clinical testing because the product didn't show a statistically significant improvement over a placebo. The decision leaves Merck's pipeline for nononcology drugs nearly empty, according to analysts.
Merck KGaA, which isn't related to U.S. company Merck & Co., already was reeling from an aborted effort to buy Schering AG for 77 euros a share. A subsidiary of rival Bayer AG offered 86 euros a share, snatching the deal from Merck KGaA's fingertips.
Under such competitive and regulatory pressure, many companies say they must grow to remain independent, and some are tiptoeing into the public markets to boost cash flow.
In May, Spain's Grifols SA listed almost 50% of its shares on the Spanish stock exchange, raising 312 million euros. The company is the world's fourth-biggest maker of blood plasma, behind Australia's CSL Ltd., U.S.-based Baxter International Inc. and Germany's Bayer. The Grifols family, which founded the company 66 years ago, remained the largest shareholder, retaining a 36.1% stake. The shares have risen 46% since the IPO to 6.44 euros.
"The main reason [for the listing] is for the company to be able to compete with other companies outside the Spanish market," Chairman Victor Grifols said on the day of the listing.
In 2005, Ipsen, France's fourth-largest drug company by revenue, after Sanofi-Aventis SA, Servier Laboratories and Pierre Fabre SA, faced price reductions by health authorities in European countries that sliced sales growth by 1.1 percentage points. In response, the Beaufour family decided to list almost 19% of the company's shares on the Paris exchange in December. The IPO raised 349 million euros for external growth, notably in North America. Ipsen shares have risen 49% from their 22.20 euros listing price.
Pierre Fabre, France's third-largest drug maker by revenue, with sales of 1.49 billion euros last year, is considering different strategies for raising funds to expand. A partial IPO also could ease uncertainty about a successor to 80-year old chairman and founder Pierre Fabre, who has no direct heir. The company, which had 1.5 billion euros in sales in 2004, already has taken steps to transfer some stock to friendly hands by creating an employee-shareholding scheme that allows workers to acquire a maximum of 10% of the capital.
"The company and its chairman don't rule out an initial public offering, but we would only be looking to list a minority stake of the capital," Pierre Fabre Chief Financial Officer Bertrand Parmentier said.
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